themostdifficultintangibleassetstovaluesincetheypossess
option characteristics.
IMPORTANCE OF INTANGIBLE ASSETS
Thefirstpubliclytradedfirmsthatgrewoutoftheindustrial
age derived the bulk of their value from physical assets.
Theseearlycorporategiants,whichincludedGeneralMotors,
Standard Oil, and AT&T, owned land, buildings, and
factoriesthatlentthemselveseasilytoaccountingmeasures
and valuation. The past half-century has created a new
generationoffirms,suchasCoca-Cola,Microsoft,Intel,and
Pfizer,thatgetmostoftheirvaluefromassetsthathaveno
physicalform.Theseintangibleassetsvaryacrossfirmsfrom
brandname(Coca-Cola)topatents(Pfizer)totechnological
expertise(Intel,Microsoft)buttheydosharesomecommon
features.Thefirst isthattraditional accountingruleseither
understatetheirvalueorcompletelyignorethem;thebalance
sheetsofthesecompaniesshowlittleevidenceoftheirvalue.
Thesecondisthatasignificantportionofthemarketvalues
of thesefirms comesfrom theseintangibleassets; there is
evidence,for instance, thatbrand namealone mayexplain
more than half of the value in many consumer product
companies.Finally,thefailuretovaluetheseintangibleassets
distorts both accounting measures of profitability such as
returnonequity andcapital andmarket measuresof value
such as P/E ratios and EV/EBITDA multiples.
Inonestudy,LeonardNakamuraoftheFederalReserveBank
of Philadelphia provided three different measures of the
magnitude of intangible assets in today’s economy: an
accountingestimateofthevalueoftheinvestmentsinR&D,
software, brand development, and other intangibles; the